What do dirty money, dodgy emissions claims and corporate greenwashing scandals have in common? They’re increasingly being flagged by regulators as interconnected risks. In the past, AML (Anti-Money Laundering) models were built to chase illicit cash flows and detect fraud. But today, companies must face the fact that ESG-linked risks are spilling over into financial crime territory, so an AML system that ignores them is dangerously incomplete.
In both the EU and the UK, the regulatory screws are tightening. The EU’s Corporate Sustainability Reporting Directive (CSRD) forces firms to publish consistent, auditable ESG disclosures alongside financial results, meaning non-financial risk is becoming “on-chain” for regulators. Meanwhile, the UK is stepping up its green finance scrutiny, including crackdowns on misleading ESG claims under the Financial Conduct Authority’s (FCA) new anti-greenwashing rules.
This article isn’t about ticking ESG compliance boxes. It’s about rethinking AML frameworks so they incorporate non-financial risks, the risks that regulators, investors and markets now treat as entirely material.
Why ESG and AML are Converging
We’re entering an era where financial crime hides behind sustainability. Take carbon-credit fraud, for example: fraudulent schemes have sold “phantom” emissions offsets to unsuspecting buyers, with payments channelled through complex corporate structures that evade typical AML controls. More broadly, false sustainability claims or mislabelled “green” bonds are being used to launder funds under the guise of legitimate ESG investment.
Regulators are waking up to this. The UK’s new anti-greenwashing rule forces financial promotions to be fair, clear and not misleading, thus tying ESG integrity to standard regulatory supervision. Meanwhile, across the EU, initiatives like the proposed European Securities and Markets Authority (ESMA) supervision of ESG rating providers and the increasing role of the EU AML Authority signal that financial integrity and ESG integrity are now seen as inseparable.
In practice, weak ESG controls create the very blind spots AML regimes were designed to catch, except now in non-financial guises. So, for banks and corporates, ESG blind spots are no longer “soft risk” side issues, they are compliance, legal and reputational landmines. It’s time for AML risk models to evolve.
Regulatory and Compliance Risk
The regulatory landscape in the EU and UK is rapidly catching up with the reality that ESG misstatements may amount to financial misrepresentation, and are thus a legitimate AML concern. Take the Corporate Sustainability Reporting Directive (CSRD) and its European Sustainability Reporting Standards (ESRS): ESG disclosures will now be audited, materially assured and legally enforceable, meaning a firm’s “sustainability numbers” will no longer be soft PR, but data with teeth. Meanwhile, in the UK, the FCA’s anti-greenwashing rule mandates that claims about sustainability must be “fair, clear and not misleading,” giving regulators explicit grounds to challenge false ESG narratives.
In practice, firms may find themselves under AML-type scrutiny for ESG misreporting. Imagine that a bank financed a company that later is exposed for overstating its carbon offsets…. investigators may treat the discrepancy as a form of fraud hidden in ESG rhetoric. Or consider the risk of green bonds being used as facades for capital flows into non-sustainable, or even illicit, operations.
To keep pace, AML risk models must evolve. They should incorporate ESG “red flags” such as:
- Inconsistent ESG reporting over time or across jurisdictions
- Use of high-risk jurisdictions with weak ESG oversight
- ESG disclosures that diverge materially from industry benchmarks
These signals could be treated similarly to classic AML indicators and flagged for deeper due diligence.
Reputation and Brand Risk
Stakeholders now increasingly see ESG failings as equivalent to integrity failings. A reputational hit, fuelled by social media pressure, media exposés or investor activism, can erupt far faster than any regulatory response. For instance, asset managers have seen large-scale redemptions when funds branded as “sustainable” were accused of greenwashing. In 2024 alone, investors pulled USD 4.7 billion from ESG funds amid rising scepticism.
In the UK, high-street banks have faced sharp criticism for backing fossil fuel projects while publicly promoting climate commitments. Barclays, HSBC and Lloyds have reportedly channelled more capital into fossil fuel firms in recent years, despite pledges to lead on green finance.
A novel insight is that reputation crises are now spilling directly into AML-type shadows. Sudden capital flight or investor withdrawals triggered by an ESG scandal can mirror suspicious financial flows that AML systems are designed to catch. These rapid shifts may signal underlying brand or integrity stress rather than pure financial motives.
To respond, firms should embed “brand/reputation volatility” indicators into AML risk models, for example, monitoring spikes in negative ESG media coverage or social sentiment, tracking key influencers’ signals, or mapping real-time withdrawal activity. These indicators act as early warning flags, enabling financial crime teams to flag and investigate flows potentially instigated by reputational stress rather than just typical transaction anomalies.
Governance and Ethical Risk
Poor governance forms the bridge between ESG failures and financial crime: lapses in oversight, weak board accountability or perverse incentives can permit fraud or abuse under the veneer of “green” strategy. In the EU/UK context, the newly operational AMLA (Authority for Anti-Money Laundering) will increasingly coordinate with ESG and corporate oversight regimes to detect threats across domains. Meanwhile, UK regulators are intensifying scrutiny of board responsibility for ESG misreporting, especially under the Economic Crime and Corporate Transparency Act 2023 and evolving anti-greenwashing rules.
A fresh lens is ESG-linked corruption, meaning misuse of sustainability-linked loans, fraudulent reporting of decarbonisation targets, or executives exaggerating green credentials. Ethical risk overlaps when ESG narratives become smokescreens, much as in past scandals where “corporate social responsibility” was a cover for bribery or accounting fraud. A striking example is Wirecard, whose collapse in Germany revealed how lax governance allowed a multi-billion-euro fraud to be masked under its innovation branding.
Crucially, AML models must explicitly embed governance signals, including board independence scores, frequency of executive turnover, prior ethical breaches or restatements, and even whistleblower complaints. Such governance factors should feed into an integrated ESG-AML risk score. In doing so, the system can flag entities whose governance fragility may be the early conduit for money laundering or financial misconduct under an ESG façade.
So, What Now?
As ESG and AML converge, businesses, and especially banks and regulated firms, must act decisively. Below is a forward-looking checklist to begin blending ESG into your AML frameworks without doubling bureaucracy:
- Embed ESG “red flags” into your AML transaction monitoring | e.g. unusually large payments tied to deforestation projects or forced-labour supply chains.
- Monitor ESG disclosures alongside financial reporting | Look for inconsistencies. E.g. if ESG reports show strong labour practices but public scandals emerge, raise alerts.
- Deploy AI and alternative-data tools | Use news, social media or satellite data to flag ESG controversies (e.g. corruption, pollution) and feed them into AML monitoring loops.
- Cross-train compliance teams | Merge AML and ESG expertise so that the same unit grasps both money-laundering and sustainability risks.
Integration isn’t about stacking layers of bureaucracy; it’s about getting ahead of the next scandal or regulatory crackdown before it hits.
ESG and AML are no longer separate domains. Ignoring ESG in your risk models leaves a blind spot regulators may no longer tolerate. Firms in the UK and EU that act now by incorporating ESG-linked risks into their AML frameworks will win resilience, trust and a competitive edge. Stay in touch for our second article, where we’ll dive deeper into social, supply-chain and climate-linked ESG risks and how to map them into financial crime models.
And what about you…?
- How far do your current AML risk models account for ESG-linked factors such as climate, supply-chain or labour risks?
- Do you currently cross-train compliance teams on both AML and ESG, or do these areas still operate in silos?
